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In strategy turnaround, China expected to ramp up REE output to regain pricing control

VANCOUVER (miningweekly.com) – The Chinese government is expected to ramp up rare earth element (REE) exports in a bid to regain control over pricing policy, according to a new report by market intelligence firm BMI Research.

This is expected to be a reversal of the government's previous export-restrictive strategy to control prices.

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Rare-earth metals are critical raw materials, used in a diverse number of sectors, including the electronics, telecommunications and automotive sectors.

Over the last two decades, China has maintained a virtual monopoly on REE output. According to BMI, China's share of global rare earths output accelerated rapidly from 1999 to 2015. In 2015, China's REE output totalled 105 000 t, accounting for over 90% of global output, with other countries accounting for just 19 000 t during this period.

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PREVIOUS POLICIES
Between 1990 and 2015, China's policy by default of ramping up rare earths output developed later into a deliberate policy of increased REE pricing power. Between 1990 and 2000, China's rare earths output grew by 450% to 73 000 t. Over this same period, rare earths output from other countries (Australia, the US, Greenland, Malaysia and Brazil) declined by 60% to 16 000 t, down from 44 000 t in 1990. The latter countries' decline was largely the result of decreasing margins on the back of an increasingly well-supplied market, researchers noted.

In 2006, China shocked the world when it suddenly imposed export quotas and duties for REE exports and, in 2010, the Chinese government decided to reduce the country's REE export quota by 40%, which saw rare earth prices soar globally. The government stated that the 2006 quota was to conserve the country's environment and limit the depletion of critical resources.

Despite more than 28 World Trade Organisation (WTO) members imposing export restrictions on certain metals and minerals during the previous decade, BMI found that there was some international concern that China's control of the rare earths market and restrictions on exports could be used as a political weapon.

Subsequently, the US, joined by the European Union and Japan, brought a case to the WTO's dispute settlement body against the Chinese REE export restrictions in 2012. China's case was brought forward to the WTO, which ruled against the policy in 2014.

On January 1, 2015, after losing its battle in the WTO's final ruling, China ended the country's 16-year-old REE export quota system and, on May 1 last year, eliminated export tariffs on REEs, including tungsten, molybdenum, iron and steel particles, as well as other products, as part of the ruling's requirement.

This resulted in China losing rare-earth production market share to other producing countries, including the US, Greenland and Russia, BMI stated.

NEW WTO CASE?
BMI expects that, in a bid to regain pricing power, the Chinese government will pursue a strategy of consolidating the country's domestic rare earths sector and increasing exports over the coming quarters.

“We believe the Chinese government will pursue a strategy of increasing supply in order to push down prices, which will put pressure on overseas miners' profit margins," said the firm.

Since the export tariffs were removed, Chinese rare-earth exports have consistently been higher than during the period beforehand, BMI noted.

The strategy has resulted in rare-earth prices falling drastically over the last 18 months. Over 2015, export prices from China's Inner Mongolia region fell by 30% compared with 2014, while China's total export value of rare earths decreased by over 40% over the same period.

Among the hardest hit have been dysprosium and cerium, which saw prices fall from $65 865/t and $883/t respectively, in May 2015, to $37 524/t and $685/t respectively, by September 2016.

While domestically this has accelerated China's consolidation drive, it also proved a major challenge for producers operating in countries such as Australia and the US. The most notable example occurred on June 25, 2015, when US-based REE producer Molycorp filed for Chapter 11 bankruptcy.

While the firm had been operating at a loss since 2011, the low-price environment exacerbated its struggles. Molycorp was able to previously maintain operations as it was deemed a key alternative supply channel for the US, other than China.

In light of China's new approach, BMI expects another trade case to be presented to the WTO by the US and other major rare earth consumers over the coming quarters.

BMI believes that Australia, Russia, Greenland and the US hold significant rare earths output growth potential over the long term. Despite this, the analysts do not expect that these countries will be able to overtake China's market share any time soon, owing to China's strategy, which has resulted in the current low rare earth price climate.